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Why Most of Us May Never Retire Comfortably

One big problem: dipping into retirement funds prematurely


(This article appeared previously on MarketWatch.)

America: At the rate you’re going, you may never get to ditch your 9-to-5 job.

In the past year alone, 15 percent of Americans dipped into their retirement funds to pay for an emergency, according to a nationally representative survey of more than 1,000 adults in the U.S. by personal finance site Bankrate.com released Wednesday — that’s 30 million Americans, if you extrapolate the survey data onto the entire U.S. population.

Other studies reveal a similar predilection towards tapping into the retirement well too soon. Nearly one in four workers ages 20 to 60 have either taken a loan or early withdrawal from their retirement fund, according to the 16th annual Transamerica Retirement Survey of Workers, released in May. And a study published this year in the journal “Contemporary Economic Policy” revealed that more than 15 percent of taxpayers under 55 withdrew money from their retirement accounts early in 2010 alone.

Many workers are tapping their retirement funds for emergencies for one simple reason: They don’t have an emergency fund. Nearly one in three Americans has no emergency savings at all, according to a survey released by Bankrate this year — the highest rate in the five years Bankrate has been doing the survey. What’s more, fewer than one in four has more than six months of income (that’s what many experts consider an ideal amount of emergency savings) in their emergency fund.

Americans are undersaved for emergencies and lacking that cushion, far too often resort to [tapping] their retirement accounts.

— Greg McBride, Bankrate.com

“Americans are woefully under-saved for emergencies — and lacking that cushion, they far too often resort to [tapping] their retirement accounts,” says Greg McBride, the chief financial analyst for Bankrate.com.

Add to that the fact that it’s highly likely you’ll experience an emergency or at least an unforeseen expense in a given year — a survey released last year by American Express found that this happens to nearly half of Americans — and you can see why so many people are dipping into the retirement well.

It’s older people who are most likely to tap into their retirement savings for emergencies. McBride says that this may have to do with higher medical bills or persistent underemployment, among other reasons, but that whatever the reason, it’s “particularly troubling.”

“These are the years when they should be putting the hammer down to boost savings,” he says.

Older people are more likely to tap retirement savings for emergencies
Age group % who tapped retirement savings for emergencies
18-29 8%
30-49 12%
50-64 17%
65+ 19%
Source: Bankrate.com


The high cost of tapping your retirement funds

Taking an early withdrawal from your 401(k) will cost you, because not only will you have to pay income tax on the total amount of money withdrawn, you’ll also typically incur an early-withdrawal penalty of 10 percent. This means that, if you withdraw $10,000 and you’re in the 25 percent tax bracket, you’ll end up paying $3,500 ($2,500 for income taxes and $1,000 in penalties) in taxes and penalties — and thus netting just $6,500.

And while if you repay a 401(k) loan on time (typically in five years or less) you won’t owe income taxes, but it’s still costly. You’ll pay interest (typically the prime rate plus 1 percent, which right now, that would be about 4.25 percent) and often fees as well. Roughly eight in 10 plans charge a one-time loan origination fee (average: $72) and more than one in four charge an annual service fee (average: $35).

Plus, 401(k) loans are risky in that if you leave your job or are laid off, you typically only have about 60 days to repay the entirety of that 401(k) loan — or risk it being treated as a withdrawal, which incurs income tax and early-withdrawal penalties. Roughly one in 10 people who took a 401(k) loan could not repay it, research shows. You also repay your loan with after-tax dollars, meaning that someone in the 25 percent tax bracket would need to earn $12,500 to pay back a $10,000 loan.

Furthermore, with both withdrawals and loans, the total cost of the taxes, penalties and fees may pale in comparison to the money you might lose out on from not being invested in the market, which can easily escalate into thousands, even tens of thousands, in lost monies.

America’s Vast Retirement Savings Shortfall

These ill-advised, costly money moves are further exacerbated by the fact that Americans are already vastly undersaved for retirement. Only about two in three workers have saved any money for retirement, according to a 2015 report from the Employee Benefit Research Institute.

And of those that have saved, for some, the amounts are paltry: Just 14 percent of American households say the value of their savings and investments (minus their primary home value) are more than $250,000 — and experts say most households will need more than $1 million to retire comfortably. (Incidentally, just 10 percent of workers think they’ll need more than $1 million to retire comfortably, according to EBRI.)

Most Workers Don’t Have Enough Money to Retire

Total savings and investments, 2015

Less than $1,000 28%
$1,000 – $9,999 17%
$10,000 – $24,999 12%
$25,000 – $49,999 9%
$50,000 – $99,999 10%
$100,000 – $249,999 10%
$250,000 or more 14%
Source: Employee Benefit Research Institute

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